Hodl Law vs SEC: Ethereum Case Gets Court Date for Oral Arguments

The 9th Circuit Court of Appeals has scheduled oral arguments for July 18, 2024, to address a legal appeal by cryptocurrency-using law firm Hodl Law, PLLC.

The firm is challenging the dismissal of its lawsuit against the U.S. Securities and Exchange Commission (SEC), which sought clarity on the classification of Ethereum and its native currency, Ether. This hearing will scrutinize the SEC’s stance and whether its enforcement policy aligns with the Securities Act of 1933.

Hodl Law’s Legal Argument

Hodl Law initially filed its lawsuit against the SEC in a California federal court, arguing that the agency’s enforcement actions against cryptocurrency projects and lack of clear guidelines could hurt its business operations.

Specifically, the firm asked for a declaratory ruling stating that transactions involving Ether on the Ethereum blockchain do not violate securities laws.

However, the case was dismissed in July on the grounds that Hodl Law could not demonstrate any direct controversy between itself and the SEC. The district court also held that the firm could not challenge the agency’s approach because the SEC had not yet made a final decision or taken concrete action against the firm.

SEC’s Response and Justification

In its response, the SEC asserted that Hodl Law’s concerns about future enforcement actions were purely speculative, lacking the specific harm required for legal standing. The agency argued that hypothetical risks associated with possible investigations did not justify a lawsuit. The SEC also pointed out that the law firm’s characterization of its regulatory approach as “regulation by lawsuit” was insufficient to warrant court intervention.

The SEC further argued that without a definitive policy or final ruling to contest, Hodl Law cannot claim a valid grievance under the Administrative Procedure Act. Therefore, the commission believes that the original dismissal was appropriate and that allowing Hodl Law to amend its complaint would be futile.

Hodl Law, however, claimed that SEC Chair Gary Gensler‘s prior comments suggest that Ether could be considered a security, contradicting a 2018 speech by a different SEC official stating that Ether did not constitute a security. The firm’s lawyer, Frederick Rispoli, criticized the SEC for not clearly defining whether transacting on the Ethereum network violates securities regulations.

The case is particularly relevant as the SEC has recently intensified its enforcement efforts against crypto companies, such as Coinbase, over unregistered securities.

Consensys’ Lawsuit Against the SEC

Concurrently, Consensys filed a lawsuit against the SEC in a Texas court, alleging regulatory overreach by the agency. Like the Hodl Law, the firm claims that SEC Chairman Gary Gensler is attempting to reverse the regulator’s previous stance that Ethereum is a commodity, not a security.

The suit also revealed that Consensys had received a Wells Notice from the SEC, indicating potential enforcement action over MetaMask’s swaps and staking features. Consensys, however, insists that Ethereum lacks the centralized management that defines security and alleges the SEC has been quietly investigating the crypto asset since early 2023.

Moreover, Coinbase’s Chief Legal Officer Paul Grewal criticized Gensler’s categorization of certain crypto tokens as securities. Grewal also noted inconsistencies between Gensler’s statements and the SEC’s prior admissions in court.

Consequently, the 9th Circuit Court of Appeals will hear the oral arguments to determine whether Hodl Law’s concerns are valid and whether the SEC’s approach constitutes overreach. The hearing will delve into the complexities of crypto regulation and the SEC’s role in providing clear guidance to market participants.

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